I’m the Washington D.C. bureau chief for Forbes and have worked in the bureau for more than two decades. I've spent much of that time reporting about taxes -- tax policy, tax planning, tax shelters and tax evasion. These days, I also edit the personal finance coverage in Forbes magazine and coordinate outside tax, retirement and personal finance contributors to Forbes.com. You can email me at jnovack@forbes.com and follow me on Twitter @janetnovack.

But sometimes, I’ve noticed, the IRS itself gets a bit too creative. Exhibit A is its treatment of the estate of legendary modern art dealer Ileana Sonnabend who died in 2007 at the age of 92. As I report in a story here that appears in the March 12th issue of Forbes, Sonnabend’s heirs sold off works by Jeff Koons, Roy Lichtenstein, Andy Warhol and Cy Twombly to pay estate taxes of $331 million to Uncle Sam and $140 million to New York State. But they couldn’t even consider selling what might have been the most famous piece in her collection — “Canyon” by Robert Rauschenberg— because the collage contains a stuffed bald eagle and selling it would be a criminal offense, punishable by a year in federal pen.

Given that restriction, the Sonnabend estate tax return (and three different appraisers the estate hired) valued the work at $0. The IRS says it is worth $65 million and is demanding an additional $29 million in tax and an $11.7 million “gross valuation misstatement” penalty from the estate.

In this post, I’d like to provide some additional context for the benefit of art collectors, tax and estate lawyers and anyone intrigued by this case, as I am. Sonnabend, by all accounts, was a strong-willed woman with an amazing eye and passion for 20th Century art. Born in Romania to a Jewish industrialist and his Viennese wife, she married Leo Castelli at 18 and even after their 1959 divorce, collaborated closely with him until his death in 1999. (Her New York Times obituary is here.) In contrast to the more flamboyant Castelli, Sonnabend amassed a huge personal collection, most of it kept in storage or on loan to museums. She bought “Canyon” (a type of work Rauschenberg called a “combine-painting”) from Castelli for her personal collection in 1959. A 2000 profile of Sonnabend in The New Yorker says she rarely parted with items she’d chosen for her personal collection, only reluctantly selling two Jasper Johns to billionaires S.I. Newhouse and David Geffen in 1998 to provide some security for her old age. In fact, the author of The New Yorker story asked Sonnabend if she might sell “Canyon,” which the Museum of Modern Art had reportedly been angling to buy. Her joking response: “Well, if they build a pyramid for me when I die, I would like it in there with me.”

But Sonnabend knew at the time of that interview that she couldn’t sell “Canyon” even if she wanted to, according to an accounting provided to Forbes by top New York art lawyer Ralph E. Lerner, who represents the estate. In 1981, agents at the Department of Fish & Wildlife became aware of the protected bird carcass in “Canyon” and notified the Sonnabend Gallery that its ownership was restricted by the 1940 Bald and Golden Eagle Protection Act and the 1918 Migratory Bird Treaty Act. Sonnabend applied for, and got, a permit to retain the work, with the understanding that she could lend it to museums here and abroad, but could never sell it or export it for sale.

In 1998, when her gallery applied for a permit to allow “Canyon” to travel to European museums as part of Guggenheim Museum organized Rauschenberg retrospective, the government sent her a letter saying she never should have been allowed to retain the work, since she wasn’t a non-profit museum. Only after Rauschenberg supplied a notarized statement attesting that the bald eagle was killed before 1940 (when the Bald Eagle Act took effect) was Sonnabend allowed to retain the painting and lend it to U.S. museums. But she couldn’t even ship it abroad for a museum exhibition, and she definitely couldn’t sell it. Yes, Sonnabend could have gotten permission to donate “Canyon” to a U.S. museum, but that wasn’t her way. “She kept all the great pieces. It was not her style to sell anything. She liked to lend (to museums) not give,’’ says Lerner. “Canyon” is currently on a long term loan to New York’s Metropolitan Museum of Art.

While many of the rich make an art form of tax minimization, Sonnabend cared only about art. She used no fancy devices to transfer wealth at a lesser tax cost and didn’t even use up her lifetime gift tax exemption. Indeed, looking at the other (mostly minor) adjustments the IRS made to her $875 million estate, one would have to conclude her estate played it straight too— the IRS Art Advisory panel made no other upward adjustments on the value the estate had placed on works in her collection.

Lerner says the “most shocking part” of his interaction with the IRS, is that he first received an unsigned report from the IRS suggesting “Canyon” would be valued at $15 million. After Lerner refused to agree it had any value, the estate was sent a formal Notice of Deficiency last October valuing “Canyon” at $65 million. According to Lerner, when he called Joseph Bothwell, the head of the art panel, to complain about the $65 million valuation, “he told me there could be a market for the work, for example, a recluse billionaire in China might want to buy it and hide it.” Last month, the estate filed suit in U.S. Tax Court contesting the IRS Notice of Deficiency and Lerner vows it will fight the case all the way through the courts. “The government is saying we want $35 million in tax but if you sell it to get the money we’ll put you in jail,’’ he fumes.

Post Your Comment

Post Your Reply

Forbes writers have the ability to call out member comments they find particularly interesting. Called-out comments are highlighted across the Forbes network. You'll be notified if your comment is called out.

Comments

It is an interesting problem. The value is clearly greater than 0. Just because you can’t sell something does not make it worthless. but it is also not right to value it based on a hypothetical black market price.

Peter: Yes the painting does have value–you can put it on the wall and look at it and get joy from it. But I can do the same thing with the watercolors from my kids, and the government agrees that there’s no value because there’s no market. The government has agreed that the value of other assets–from stocks to real estate–is established based on a fair market value. (I would guess there are other similar cases in which someone inherits land that has a large inherent value, but little or no market value because of a similar stipulation.)

What’s the market value? I guess Sonnabend’s heirs could set up a booth on Fifth Avenue where tourists can have their photos taken with a Rauschenberg for $5. But if you want a frame it’s $8.

This is a fascinating subject. I’m not a lawyer, but I know that “Fair Market Value” as defined by IRS Section 1.170 and Treasury Reg. Sec. 20.2031-1[b] is “the price at which the property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or to sell and both having reasonable knowledge of relevant facts.” And also that the sale should take place in the most common and appropriate market. A potential sale on the so-called “black market” really doesn’t sound like it’s included in this definition. I think the Sonnabend heirs are being ripped off.

If you want to get a better feel for the “creative tax strategies” employed by said Mr. Olenicoff, then perhaps you should review the pleadings that were filed against him in federal court this past week in Orange County. These pleadings run almost 100 pages. They are very interesting and quite revealing. No, I think “devastating” is the word that I was searching for. Perhaps it’s time for a follow up interview with Mr. O. What think you, Ms. Novack? “Tax strategies”? Please.

You state: “One reader of my initial story suggested the estate could donate Canyon for a $65 million tax deduction. Nope. Both Lerner and Berus say the owner of a work like Canyon can’t, under IRS rules, claim that deduction.”

But in Sammons vs. Commissioner 838 F2d. 330 (9th Cir. 1988) the Tax Court did not prevent Sammons from claiming a deduction for American Indian artifacts that were donated to the Museum of American Cultures despite the IRS contention that such a donation should be disallowed.

I wonder which IRS rules the author refers to that would prevent the estate from donating “Canyon”? Can anyone provide a citation that would support the position that the IRS prohibits such a donation?

This was an interesting problem. While not addressing it directly, let me point out a few issues. Fair market value is a hypothetical number. See Robson v. Commissioner (TC [Tax Court] Memo 1997-176) where this is re-affirmed, although this has been mentioned more than once in the Tax Court records. As correctly pointed out by Ms. Novack, the 1991 letter ruling notes that what can be passed on to heirs is includible in an estate, since the estate has control of the object. Joe Meador may not have had legal title, but he did have control of the purloined property and he did pass it on to his heirs. Lastly, Dave Maloney is right in asking what prevents this from being donated. Unlike the Meador issue, there seems to be no question regarding legal title. And the Bald Eagle Act seems to allow legitimately-owned property to be passed on to heirs. One also notes that this work was exhibited at the Venice (Italy) Biennale in 1964, twenty-four years after the passage of the Bald Eagle Act. So, Catch-22?

Well, if I were arguing this case before a judge, I think the winning defense would have to be that since there is a proven “black market” for human organs for transplant, then the IRS would have to immediately start taxing every U.S. citizen for the “black market value” of their internal and transplantable organs. It doesn’t matter if you can’t legally sell your own personal internal organs in the U.S. Some Chinese billionaire could hypothetically pay for them on the black market!